Structure & Growth of Public Expenditure in India

1 year ago

Atiqur Rahman

9 minutes

Structure or Classification of Public Expenditure in India

Classification of public expenditure refers to arranging various components of public expenditure on a systematic, scientific, and economic basis from which one is enabled to distinguish between the nature and effects of different kinds of public expenditure.

In order to make it more useful and effective, the classification should not be formal. It must always have some meaningful and realistic public expenditure to reveal the effects and incidence of various kinds of expenditures and also focus on the relative importance which has been put on each head of expenditure.

It is also significant in a democratic country, as the people need to know whether the public expenditure is appropriately spent or is used for wasteful purposes or is misappropriated. Most economists believe that the basis for classification should not be absolute, but it should be relative to the purpose for which classification is taken up.

As per R. N. Bhargava, a good classification must satisfy two tests as follows:

The classes should be mutually exclusive so that the idea can be allocated to one class only. This will make the classification exact.
The basis of classification should be a necessary attribute of the object classified. This will make it scientific and sensible.

Many classifications have been given by economists, and each classification is relative to the need for which it was given. Some of the classifications have laid emphasis on benefits received by individuals, and others have emphasized the functions of the government.

We are following in this lesson the Public Expenditure Classification adopted by Govt. of India

1. Plan and Non-plan Expenditure:

India has implemented economic planning as an approach to economic development. The Government of India’s Expenditure is divided into Plan and Non-plan Expenditure.

Plan expenditure is incurred on govt programmes & flagship schemes, while non-plan expenditure comprises spending on defence, subsidies and some devolutions to states. Plan expenditure comprises current development & investment outlays that ascend due to suggestions in the current plan.

Non-plan expenditure is one which the government is obliged to do, i.e. the estimated expenditure is given in the budget for expenditure during the year on routine working of the government. It comprises both development & non-development expenditure. Part of this expenditure is mandatory, like Defence, Police, etc. Expenditure on maintenance of assets of the previous plan is called non-plan expenditure in the current plan.

2. Revenue and Capital Expenditure:

The United Nations prepared ‘A Manual for Economic & Functional Classification of Government Transactions’ in 1958 for the functional and economic division of their budgets. The budget is separated into two heads Revenue and capital, and therefore, both Receipts and Expenditures are divided into two heads: Revenue and capital.

India’s Case

In India, Revenue Expenditure includes all current expenditure on administration, defence, and public commercial undertakings like railways, post and telegraph, etc. Capital Expenditure consists of all capital transactions, including defence and capital transactions of public commercial undertakings.

In India, such classification of the government’s budgetary transaction to the Central Budget has been followed since 1957-58. In India, revenue expenditures include all current expenditures on administration, defence and public commercial undertakings like railways, post and telegraphs, and grants-in-aid while capital expenditure involves all capital transactions.

Growth of Public Expenditure

Public expenditure has increased manifold in the recent past, and it continues to exhibit an increasing trend in almost all countries of the world. In the words of C. C. Plehm, “Public Expenditure grows because, and as, public activities increase. This increase is both extensive and intensive. Government in every branch- central, intermediate, and local- are constantly assuming new work or duties and are constantly performing the older functions and, in turn, newer ones also, on an ever larger scale”. In India also, public expenditure has been increasing over time.

Reasons for Growth

Growing Population: An upsurge in population calls for an upsurge in public expenses. Population growth has made it essential for governments of most countries to spend cumulative amounts on health, education, social security, subsidies, etc.
Inflation: Inflation would mean that the Govt is forced to incur more expenditure in providing essential goods to the public. Hence, the public expenditure would increase.
Urbanization: It has raised the dependence of people on the government for basic requirements such as drinking water, sanitation, etc. It has also led to the migration of labour from rural areas that end up living in slums. The government has to take the responsibility of these people and provide them with the basic requirements.
Interest Payments: Govt borrowing has been on the increase. As a consequence, the government has to incur large interest payments, resulting in a rise in public expenditure.
Economic Development: In less developed countries, the Govt has to take the responsibility of achieving rapid economic development because the private sector is not willing to take up huge investments. This leads to an increase in the public expenditure.
Social Security Measures: The government offers social security measures for the welfare of the people, which increases its expenditure. It offers processes such as old-age pensions, free education, medical facilities, public works & relief programmes, etc.
Defence Expenditure: Defence expenditure has increased over the years. It is essential because it reduces the possibility of external threats.

Growth Trends in India

The table below shows that the total expenditure in India has risen from Rs 231.94 billion in 1980-81 to Rs 13474.70 billion in 2011-12. Also, the table shows that the share of plan expenditures in total expenditures dropped in the 1980s. It started rising after 1990 & reached its peak value of 30.78% in 1993-94.

Subsequently, the trend reversed again & the plan expenditures in 2000-01 were 25.39 per cent of the total expenditures. Though the share of plan expenditures upgraded in 2007-08, it continued to be low as compared to the earlier decades. In 2011-12, the plan expenditures rose to Rs 4266.04 billion as compared to Rs 89.94 billion in 1980-81, presenting an absolute rise of about 45 times. At the same time period, the non-plan expenditures have improved by about 65 times.

Table 1: Plan and Non-Plan Expenditures of the Central Government

The table below shows that the share of development expenditures in the GDP increased after 1981-82 & reached its peak values in the mid-1980s. The share of development expenditures fell sharply in the 1900s and 2000s. An essential factor that has been restraining the growth of development expenditures is the rising share of non-development expenditures.

Table 2: Development and Non-Development Expenditures of the Central Government

Development and Non-Development Expenditures of the Central Government-1

Development and Non-Development Expenditures of the Central Government-2

The revenue expenditures of the govt have increased from Rs 144.10 billion in 1980-81 to Rs 11619.40 billion in 2011-12, as shown in the table below. Capital expenditures during the same period improved about 20 times from Rs 83.58 billion in 1980-81 to Rs 1567.80 billion in 2011- 12.

Table 3: Revenue & Capital Expenditures of the Central Govt

Revenue & Capital Expenditures of the Central Govt-1

Revenue & Capital Expenditures of the Central Govt-2

Structure & Growth of Public Expenditure in India

Structure or Classification of Public Expenditure in India